David Evans on the New Media

This is a copy of a speech by David Evans, Editor-in-Chief of CPI, given at the Jevons Institute colloquium on New Media and Competition. To read Commissioner Joquín Almunia’s speech and Ed Richards, Chief Executive (Ofcom) on the same topic, click here.

I’m going to introduce you to the business ecosystem that has emerged in the last 15 years since the commercial internet began.  It is keeping competition authorities and communication regulators very busy.

Just last week the French Authority found that Google was dominant in search advertising and imposed interim measures.

Regulators will be getting busier because new firms are raising lots of complicated issues involving antitrust, consumer protection, and regulation: not only for themselves, but also for the traditional firms that these new ones are challenging, and for the industries that these new firms are disrupting.

Most of the firms that we’re going to talk about today are media firms that provide content to attract viewers and that sell access to these viewers to advertisers.  And we also will be talking about the communication firms that provide the internet connections that make all this possible.

But you’ll see that these categories-the 20^th century labels of media and communications-don’t really do justice to the new forms of businesses that are emerging and that have become the subject of considerable controversy.

Let me introduce the ecosystem by describing three of the most significant firms today, and dazzling you with some numbers that tell us a lot about this new world.

400 million

That’s the number of active users of Facebook around the world.

On any given day, half of them log on.

500 billion

That’s the number of minutes they spend on Facebook over the course of a month.

The number of Facebook users more than doubled last year. It continues to grow like a mushroom around the world: about 5 percent a month.

So what is Facebook?

I’m going to revert to the language of the 20^th century.

Facebook is a media company, plain and simple.                

It makes money by getting people to view pages just like a newspaper does. And then it sells advertisers the ability to presents ads to those people.

It is also a communications company. Just as plain and simple.

The average user on Facebook has 130 friends.  People use Facebook to interact with their friends.  Those who use social media a lot probably don’t use the phone so much anymore.  Why call a friend to chat about the great time you had last night when you can post a message and picture for all your friends?

Facebook is just one of the giant companies that have emerged in the last few year-and that provide media and communications services, in one fashion or another.

Most people, by the way, describe Facebook as a social networking company.  And that it is. It exploits our connections and the connections to our connections and so on.

Facebook is more than 7 times larger, based on unique visitors, than the next largest social networking company, which is MySpace. 

88 billion

That’s the number of Google searches each month as of the end of 2009.

Google makes most of its money from selling advertising: $23.6 billion worth in 2009.  When you search for something, Google often shows little text ads on top and to the right of the results.

In twentieth-century speak Google is sort of like the yellow pages.  But so much more because, as it says, its mission is to “organize the world’s information and make it universally accessible and useful”. It has been working on digitizing all of the books in the world.  And then of course there are the roving vans that videotape the world-and perhaps more.

Google has more than an 80 percent share of searches and of advertising for searches in most countries outside of Asia.    

Almost half of online advertising spending in the United States goes to Google.  And more of advertising spending in the United States is going online.

Here’s a much smaller number for you.

34 million

That’s how many Apple iPhones that have been sold to date: a trivial fraction of the 4 billion mobile phone subscriptions around the world.

But Apple accounts for 40 percent of operating systems running on smart mobile phones.  Smart phones are basically little computers with browsers that are connected to the internet over a wireless connection. With one of them a person can get everything on the internet.

You might ask why I’m even mentioning Apple. It isn’t really a digital media company or a communications company. But it touches every company that is.  The iPhone provides a platform for digital media companies to reach viewers. Apple is also helping them sell advertising. 

Apple has made the mobile phone operators less relevant and less powerful.  It used to be that people chose a mobile operator and then selected one of the many phones they offered. Increasingly, people decide whether they want an iPhone or an Android and then choose the mobile operator that has the device they want.         

These companies wouldn’t be able to do anything without the internet.  That’s provided by a whole host of communications companies that generally operate in specific geographies.  In the United Kingdom, people get connected through telephone and cable companies such as British Telecom or through wireless providers such as Vodafone.  These firms are subject to traditional public utility regulation in most jurisdictions.

Each of the companies I’ve mentioned supports vast numbers of complementary businesses.

Facebook, Apple, and Google operate software platforms.  They encourage entrepreneurs to develop businesses that are based on applications that run on their platforms.  That was a secret to Microsoft’s success with Windows.  These new firms have ratcheted that business model up a level.

550,000+

That’s the number of active applications that are available for Facebook.  Many of them are trivial. But others like Farmville attract millions of users and make massive amounts of money mainly by selling virtual goods. Yes, you can actually make a small fortune selling a bunch of pixels that look like an artichoke to make-believe farmers.

150,000

That’s the number of applications for the iPhone. Many of these are also silly little things. There’s even an app for atheists. But others are the basis for standalone companies.  In the United States, late last year, the company Square introduced a way for small merchants to accept credit cards by attaching a small plastic device to iPhones that works with an application that installed on the phone. It is intended to be the basis for a significant payment system.

These numbers are growing quickly. In fact Apple, Facebook, and Google are propelling themselves forward through network effects. More users encourage more developers to write more applications.  More applications encourage more people to become users which encourage more applications.

We have gotten used to talking about the online world versus the physical world.  In developed economies, that will soon become like talking about places with electricity and places without electricity.  Many devices are getting connected to the internet and are relying on software in the cloud for services.  When you walk into a bricks and mortar store in the future you will be swiping your card through a device that is connected to the internet with software that resides in the cloud.

That the online world is sucking up the physical world is a very important development for media companies.  That brings me to the wars for the three screens.

There are about a billion desktop computers.  That has been where most internet content has been consumed and where most internet-based communication has taken place in most countries outside of Japan. Lots of battles for the desktop were fought over the last twenty years. We can declare some victors for the time being. Google trounced everyone else in search in the last decade. Microsoft became the standard operating system in the 1980s.

There are more than 4 billion mobile phone subscribers around the world. Many don’t have computers. Over time they will convert to smart phones. That’s where they will consume media and communicate.

Naturally there’s a fierce battle going on here.  Apple is in the lead. But Google developed the Android operating system and has gotten phone manufacturers to introduce phones for it. Already there are more than 50,000 applications for Android and Android phones outsold iPhones in the first quarter of this year. In Western Europe, Google’s Android has a 73 percent share of the operating systems running on smart mobile phones.

There are also more than 4 billion television viewers around the world.  Television accounts for about 35 percent of global advertising revenues.  A lot of effort has gone into bringing information technology to the living room. Billions were squandered in the last decade on services that people didn’t really want.

Google has just announced that it is introducing Google TV later this year. If you want to get a glimmer of the future, watch the two-minute video for Google TV on YouTube. The search giant has partnered with Sony and others to develop television sets to incorporate the same Android operating system that it has used so successfully for mobile phones.

If you look at the digital media and communications around the world today, Apple, Facebook and Google are the most significant firms: the ones who should keep each other, internet rivals, and traditional firms awake at night.

But this changes all very quickly. If I had given this talk four years I suspect I would have said that the Great War was going to be between Google and Microsoft.  Apple hadn’t launched the iPhone and the Facebook had only 18 million users. Ten years ago, when a district court found that Microsoft was a monopoly and ordered its breakup, it was hard to imagine a world that wasn’t controlled, like a puppet master, by this then young company.

Last week Microsoft pulled its new smart phone, designed for the young and hip, from the market because hardly anyone wanted to buy it.  Microsoft was leapfrogged first by Apple and just recently by Google in mobile phones. And it is nowhere after several failed attempts in television. As the New York Times reported on Monday, many young developers aren’t interested in writing for Microsoft platforms.

Today, Apple, Facebook, and Google look secure.  You could even say they are protected by an application barrier to entry. But if one thing has been demonstrated in the first fifteen years of the internet it is that nothing stays the same for long.  Who would have predicted the rise of Twitter a couple of years ago?  There were more than 75 million users the beginning of this year for this new form of digital media. And who would have forecast that MySpace, which used to own social networking, would now be a distant number two.

But these dynamics don’t mean that competition authorities should be any less vigilant here than in any other important sector of the economy.  At no time in history have we seen the emergence of firms that have become so significant on a global basis so quickly.

As these new giants strut around the world they throw off controversies for regulators like beads of sweat.

And they raise interesting issues. 

In many countries traditional communications and media firms are subject to regulation.  Does the emergence of these new media and communications firms mean that we should extend regulation to them; that we should abandon regulation of traditional firms; or something in between?

We have a lot of experience doing market definition.  But many of these new firms operate in multi-sided markets, which makes deciding on boundaries rather hard. Also, the extent to which the products of these new firms substitute for the products of traditional firms is changing very quickly.  Can standard methods cope under these circumstances and if not what should we do?

There are new issues, too, like privacy and the role of data.  Each day these and other companies take lots of data from us and use it to make lots of money for themselves. Should antitrust regulators consider changes in privacy as possible consumer harm, in evaluating mergers for example?

These are just some of the topics we’ll be touching on today and I suspect for many years to come.